THE TOO-BIG TO FAIL :

Evidence and Forbearance.

Miguel Ruiz M
Abstract
This article studies the Too Big To Fail (TBTF) doctrine, it is one
doctrine that explain why big banks or big companies are not
allow to fail.

We examines the main features of the TBTF

regimes , we give a brief history of the doctrine when it started

to be applied and which were the foundation for applying it . An
analysis of the consequence of the doctrine.
One of the most important sectors in an economy is the financial sector. A
buoyant financial system is correlated with a growing economy. There is
empirical evidence that access to credit improves productivity of certain
sectors of the economy. Perhaps of this it is important to have a stable
financial system that can respond quickly to bank runs that may occur.
The Too big To fail (TBTF) postulates that a government in general can not
allow big banks or big companies to fail for the reason that they are very big
and a failure can bring adverse consequences to financial system.
Regarding this we might face a trade off, in one side we have that some
companies want to grow , want to be big. They want to take advantage of
economics of scale or economics of scope. This make them more efficient
than smaller firms. Usually Big companies have more market power and a
lower cost of capital. In the other side we can have that this big companies
are riskies for the economy. They can be to big or too well connected that a
failure of one this companies can be disastrous for the financial system.
This article is organized as follows. In the next section we discuss how the
TBTF beginnings , when it was articulated , its development and the
implication and consequences of it. In section II then presents the rationale
and finally the last section , the third section,

summarizes the policies from the past and into the future that aim to deal
with the doctrine, both in the US and around the world.
The TBTF problem
The TBTF problem was formally articulated in 1984. When the congressman
McKinley exclaim that : there is a new kind of banks. It is called too big to
fail , and it is a wonderful bank. . It was in consideration for Continental
Banks bail out.
The banks that are considered TBTF are banks that can be considered
systemically important financial institutions, or SIFI. Even though we say
that size is important it is not sufficient condition to be considered SIFI,
there are other aspects that we must consider to be catalogued as SIFI.
The systemic importance of banks could came from another sources such as
: undermining confidence in other large institutions with similar investment
portfolios and, hence, runs on those institutions.
Rochet and Tirole (1996), Freixas and Parigi (1998) gives evidence that a
financial institution that is linked to many other institutions via lending and
borrowing relationships, may cause those firms to fail if it fail itself.
Morrison and White (2010) argue that regulators are concerns about their
reputations. In case of a bank failure the public can loose confidence in
other banks supervised by the same regulator, therefore could cause a run.
Other problem is the economic cost a bank failure, Ashcraft (2005) have
found reduction in Texan GDP after a failure of Texan banks.
These arguments given above were used by American Financial autorities to
jutify Feds rescue of some banks. Besides the economics reasons is
inevitable to keep some institutions as TBTF for political reason. As this
could be the case in many economies , it is important to have present the
implications of an TBTF policy.
Development of the TBTF

Many believe that the first bank bailouts came from the government side,
but was otherwise. In the last two decades of the nineteenth century had an
important role crearinghouses to save banks. Until the Grand deprecion, the
U.S. economy had suffered financial crises every 15-20 years. It is then that
the American government design a kind of financial safety net and deposit
insurance designs, regulates securities.
In the panics of 1880 and 1890 the member banks of the New York
Clearinghouse took the responsibility of saving partner banks. The
participation of the Clearinghouse in 1884 was so timely that allowed the
bank run pass the border of New York. This is the first example we can point
the loan clearinghouse Emison certificate by the New York Clearing House so
that I avoid the spread of the crisis. The panic began with the fall of Marine
National Bank, which was a small bank, this bank will fall segui a brokerage
firm, Grant and Ward. This led to a third institution, the Second National
Bank, suffered a run on its deposits. The concern was higher when the
Metropolitan National Bank faced bank runs they did close.
The problem with the latter is that bank had many commercial and financial
relations with other institutions which could carry disease. To avoid this the
New York Clearing House Association issued an certificate of GBP 600,000
for the Metropolitan Bank. The bank opened the next day avoiding run to
other institutions. The next run was in 1890, which began with the fall of a
Brokerage firm in November 1890, this caused problems for two banks, the
Bank of North America and the Mechanics and Traders Bank. Fortunately the
Clearing House Association act in time, issuing certificates and the crisis
continued. At the beginning of the twentieth century there were also bank
runs. Exactly a bank run in 1907 in the city of New York began at the
following banks problems Mercantile National Bank, New Amsterdam Bank
and the National Bank of north America.
The Clearing House Association acted in time to deliver the money that
these banks need not to close their operations. The same initial luck did not
run the Trust Company of America and the Knickerbocker Trust, both
institutions were investment banks, and these were not part of the New York

Clearing Association. In the first instance there was no decision to save

them but due to the panic that finally genre Loan Certificate issued. After
the events following a period of relative calm until the time of the Great
Depression. In reaction to the Great Depression regulatory measures were
introduced, creating the FDIC, separation of commercial banks and
investment banking.
The Federal Deposit Insurance Corporation ,FDIC, was created 1933 to
protect depositors

holding small accounts. It was no created to keep

insolvent banks in operations. From 1950 until 1982 theFDIC act allowed
the FDIC to prevent a bank from failing if the bank were judged essential
to provide adequate banking service in its community.

A bank can be

bailed out if two of three FDIC board members determine it should be. Since
1982, the FDIC has had can prevent failures by arranging purchase and
assumption transactions if it determines that liquidation of banks is a
costlier alternative.
In 1971, Unity Bank in Boston became the first bank bailed out. The Bank
was saved because of a fear that failure of this bank would provoke riots in
black neighborhoods. This bailed out could be identified as the first step in
establishing too big to fail as public policy

The problems about TBTF returned in the early 80's. The problem began in
1984 with the Continental Illinois Bank and Trust Company that was the 7th
largest bank in the U.S..
This case is one of the best examples of TBTF in the U.S.. The Continental
was an U.S. bank that received financial aid from the FDIC. The aid consisted
of a contribution of $ 1 billion to the bank. Two facts are important to note,
first, that the help came in conjunction with a public statement in which the
FDIC guaranteed money to all depositors and creditors of Continental so
they do not suffer any loss, the second is that the FDIC took over the
administration of the bank converting it into a government bank.
Financial and banking authorities of that time argued that the fall of the

Continental would mean that other banks have bank runs which would have
ended in a systemic crisis. This led to Congressman Stewart McKinney
declared that there was a new kind of bank, to be called too big to fail. TBTF.
After the Continental had a crisis that led to declines of some banks at the
beginning of the 90s. As a result the FDIC had to recapitalize its background.
This principle of TBTF persisted during the crisis at the beginning of the 90's
when the U.S. government rescued some institutions that were not part of
the insurance system. The Long-Term Capital Management, a hedge fund,
collapsed in 1998 but was rescued on the ground that could bring a
systemic risk. This was the beginning of TBTF status granted to hedge
funds. In the XXI century the American government also proceeded to
rescue some financial institutions because of their systemic risk. Some of
these institutions were investment banks, to which they extended the
principle of TBTF.
US government saves Bear Sterns allowing its sell to JP Morgan Chase by
providing $ 30 billion in financing. Washigton Mutual was taken over by the
government and then after sold to JP Morgan.
In october 2009, nine large banks were recapitalized by the government .
This was followed by other bailouts for Citigroup, AIG, Bank of America.
Contrary to what happened to these companies, Lehman Brothers was
allowed to fail. Its failure stunned the market, short term borrowing and
lending froze. There are a lot of controversy around the Government
decisin for allowing Lehman to fail.
Some economists state that this was a mistake
Characteristics or attribute of a TBTF scheme
Stern and Feldman (2004) state that a TBTF is a regime where uninsured
creditors expect to the government to save them from failure of big banks.
Nevertheless we can detail the main attributes of a TBTF.
1.- In general banks or financial institution are assessed as TBTF , however,
we

can

find

insurance

corporations,

automobile

manufactures

and

companies from other sectors to have been beneficiated as TBTF

companies.
2.- The institutions or companies that are catalogued as TBTF usually exploit
their protected status, this also includes parties as creditors , employees
and management board of the financial institution
Categories of state protection measures.
The first state protection

measure is the provision by central banks of

liquidity to financial intermediaries, in this way , the state ensures the

provision of liquidity and the consolidation of financial system.
A second protection measures is given to individual banks through buyingup toxic securities, loans , or recapitalization. The last measure of protection
is the guarantees for bank deposits, interbank loans
THE RATIONALE FOR TBTF
In this section we discuss the main reason for a TBTF policy , all of then are
considered under the systemic risk premise. In general it has been argued
that TBTF policy in banking is necessary because:
1.- The financial system can have systemic problems when a large bank
fails, leaving some depositors and other creditors unprotected. Without a
TBTF policy it is feared that depositors that are not insured will withdraw
their funds from the banks, thereby accelerating the problems facing these
banks and perhaps spilling over to other weaken banks then forcing them to
fails too.
2.- The banks supervisors and regulators have a difficult time determining
which banks are viable and which need to be liquidated, one that depositors
start to run for their deposits.
3.- if a considerable amount of time is required to arrange for the sale of
liquidation of a large bank , uninsured depositors the opportunity to move

their funds to safer institutions. Thus, unless the supervisor is willing to

close large banks at the first sign of trouble, and thereby incur the large and
often unnecessary expenses of liquidation, it is unlikely that uninsured
deposits will remain by the time a determination of nonviability is made.
The prevention of systemic risks that can overwhelm the banking and
financial system is the primary argument made in the support of the TBTF
doctrine. Systemic risk, or serious disruptions in domestic and international
payment and settlement systems.
The failure of a large bank could impar the payment system among
individuals and banks to a sufficient degree to have a enormous impact in
the economic activities of a country. Large banks are typically providers of
correspondent banking services to smaller banks . Part of the compensation
received by the larger banks is in the form of compensating balances held
by the smaller banks at the correspondent bank. If there is a failure of one
larger bank we could have a effect of liquidity and solvency problems for the
smaller banks.
One of the major of systemic risks is related to the risk of depositors runs on
banks if confidence in the banking system is shaken. The run can affect both
healthy and un healthy banks and lead to significant short-run credit supply
problems. The credit relationships are not readily transferrable from one
institution to another , because the initial lending institution often has
unique information about

the borrower and have been monitoring loan

progress. A run on the deposits at one bank will lead to increased deposits
at stronger banks, but it will be much more difficult for borrowers to move
from one bank to another. Hence , with this the doctrine TBTF may be
justified because a rapid shift of deposits from weak banks to stringer banks
may have serious consequences for the creation and maintenance of credit
relationships.
Another source of systemic risk is related to the role that large banks play in
the market for mortgage-backed securities, government securities and
municipal securities. Large banks provide liquidity to many of these markets

because the banks play the role of a marketmaker. Thus, a collapse of a

large bank could damage the operation of these markets.
IMPLICATIONS OF TBTF
When banks do not expect to bear the cost of bank failure, they asume
more risks. It is more likely that bankers take excessive risk by the invisible
hand. In addition, because uninsured depositors and bond holders do not
lose in a bank failure, then they do not take actions to monitor the banks
activities .
There is academic evidecnes that support the hypothesis that a TBTF policy
lowers the cost of bank funds (OHara and Shaw,1990) . After a TBTF policy
the bond spreads cease to reflect bank business risk.
Another implication is the expansin of large banks. The bond prices react
positively to bank merger when this merger brings a TBTF status. The TBTF
is like a premiun, therefore banks are will to pay more for obtaining it.
This finding suggest that banks expands for reasons other that to obtaining
scale efficiencies, the scale expansion leads to banking concentration
Even though the academic evidence for scope economics is contradictory ,
the 2007-9 financial crisis provides strong support for the hypothesis that
banks increase the scale of the TBTF effect. The Fed gave support to a large
number of non-banking firms.

As example we have de AIG bailout. A

possible consequence in the future is likely to have a greater distortion in

security markets firms.
We can say that the history of the Too big to fail is not very recent, this
problem is linked to the history of American financial regulation. The
regulations on financial markets and institutions have always been and are
oriented to the stability of the financial system of a country.
Tbtf The problem is a problem that is closely linked with moral hazard, it is
generally assumed that when there is protection for depositors or there is a
guarantee from the government bailout because of the size you can have a

bank, banks often take riskier actions that they would do if they had the
mechanisms outlined above. The banks made riskier decisions makes the
financial system becomes more fragile which could lead to a future crisis.
The bank bailouts and deposit insurance are responses of governments to
prevent bank runs, analyzing the past we can say whether these measures
are adequate or not. As the task of this paper, the problem of not tbtf focus.
The theory tells us that the bank rescaste should occur only when many
institutions are in crisis, but what happens if a single bench which is in crisis
and this bank is so large that could destabilize the financial system and may
even cause a crisis systemic.
What happens is that usually save the big bank, so would avoid a systemic
crisis, but the same bank bailout has not allowed to see the crisis and this
may

convince

economic

agents

save

banking

authorities

financial

institutions.

ECONOMIC CONSEQUENCES OF TBTF

They systemic risk associated with large banks failure is the justification for
TBTF, nevertheless we should consider the TBTFs economic consequences.
Generaly described as the moral hazard problem, the flat rate system
creates undesirable incentives for the management of banks as well as the
depositors. If the objective of the bank management is maximaze the wealth
of the stock holders management clearly has an incentive to increase the
risk of the banks asset portfolio.
The problem is that the increased risk is shared by all claimants to the
bank`s assets, but the potential rewards is only to stockholders. When
deposit insurance is not risk sensitive the banks equity holders benefits if
its

risky investment pay off. But if the risky investment default ,

stockholders lose their capital investment and either depositors or the FDIC
bears the cost of failure. The deposit insurance system provides a deposit
subsidy to shareholders.

The other problem is for the structure of the banking industry. It follows that
the moral hazard/deposit subsidy effects are exacerbated as a banks net
worth diminish. The structural implication is that larger banks have an
incentive to maintain lower capital-to asset ratios than smaller banks. The
asymmetric distribution of the deposit subsidy also impacts the behavior of
depositors. Depositors of larger banks have little incentive to monitor the
riskiness of banks. If the banks fails , the insurance is obligated to protect
small depositors, and large depositors can rely on the FDIC to extend
coverage in accordance with the TBTF doctrine.
A TBTF policy can have a negative effect on the economic efficiency of
banking. The economic conditions in a particular banking market may be so
severe as to cause a bank to be unviable and to fail. This bad luck can result
in the failure of both efficient and inefficient banks. The optima system is
one where regulators are able to determine which are the efficient banks ,
and which are the inefficient banks that should be closed. The current TBTF
policy does not allow this. Thus , we have a kind of zombie banks , these are
banks that are allowed to continue in operation and also to compete with
the efficient banks, provoking damage to them in the long run. This zombie
bank results in costs that all banks must share. Thus the TBTF policy,
creates an incentive for banks to become larger and risky
Empirical Evidence of measures of protection.
At the XXX section we explained the 3 kind of state measures of protection.
Regarding the provision of liquidity to financial intermediaries , Jordan
(2009a) the SNB responded with liquidity to the banking system over
various terms to almost an unlimited extent.
As evidence of recapitalization ,the second state measure ,we have the
Capital Purchase Program (CPP) and the Targeted Investment Program (TIP).
According to the IMF the total solvency assistance in USA was 4.6% of GDP;
5.5 % in Autria , Belgium , Ireland
Regarding the guarantees for banks deposits, the largest guarantees were
given in Ireland, The Netherlands, Sweden and United Kingdom.

SECOND SECTION
In this section we give a brief review of empirical evidence and test. We
highlight the test used and their results.
We will start with an interesting research in given by oHara and Shaw
(1990) where they investigate the effect on bank equity of the Controller of
the Currencys announcement that some bank were TBTF. The authors
examine how the TBTF policy could affect banks operations and review the
factors that influence the security markets reaction to this policy.
The approach used by them is an event of study that allows them to
determine both the direction of any equity market reaction, and, the size of
the reaction for individual institutions.
As methodology they use they average returns for an eleven-day window
centered on Sep 1984 for 63 banks and they use a test statistics that is
based on the standard deviation estimated for the portfolio of sample firms.
Once calculated the average residual the results show residual returns are
not significantly different form zero for the 63 banks.
This means

that the market did react to the TBTF

policy , either with

positive or negative returns depending on factors such as size and solvency.

They state in the conclusions two important things.

First, that the TBTF

policy brings inequities because it charges all institutions the same

insurance premium but provide greater coverage to some banks. Second,
that the lack of clarity in regulatory policy may cause the market to react
negatively to some intended benefactors of a policy change.

2.)In 1996 Angbazo , Lazarus and

Saunders test the hypothesis that the

regulatory shift from full deposit coverage for some large banks to partial
coverage for all banks increased the risk and cost of bank deposits. First,
they examine the impact of TBTF restrictions on the cost of funds of
commercial banks. Secondly, there is an examination of the impact of the
depositor preference statute on bank cost of funds. Finally, examine the
changes in market values of commercial banks relative to the changes in

TBTF and depositor priority to determine whether these changes had any
wealth effects and how the effects were distributed by bank size
They took data consist of daily stock returns for a cross-section of national
and state chartered commercial banks, the sample period covers 120 days
preceding the first public announcement to 120 days after the Presidents
signing of the banking-law reform package. The tests examine the excess
returns on the dates on which new, major information about the new TBTF
policy became public.
They employ the methodology suggested by Schipper and Thompson
(1983)1 to analyze the impact of events leading to the reform of too-big-tofail doctrine on the market values of commercial banks. The approach
conditions the returngenerating process on the occurrence or nonoccurrence of relevant news events, and employs generalized least squares
(GLS) estimation.
The results show that the systematic risk estimate for large banks declined
sharply after the passage of FDICIA, indicating that bank risk declined, partly
as a result of the banking law reform increasing the incentives of depositors
to be sensitive to the financial soundness of their banks. Consistent with the
lower systematic risk estimates, the cost of deposits, and non-deposit funds
were significantly lower in the post-FDICIA period.

3.)As we mentioned above in 1984 , the Comptroller of the Currency stated

that 11 largest banks were too big to fail. Black , Collins, Robinson and
Schweitzer (1997) ask weather the announcement altered the perception of
riskiness of all banking system.
They collect dividend cuts and omissions for all Bank holding Company
(BHC) from 1971 through 1991, the BHC returns and dividends are adjusted
for stock splits and stocks dividends.
They did 2 test.

First , they examine the changes in institutional equity

ownership from 1980 through 1988. Second, they examine stocks returns

Schipper and Thompsons (1983) explicitly incorporates heteroskedasticity in the

estimation process. It makes more efficient use of the available data and is particularly
suitable for studies involving relatively small sample sizes.

behavior of bank holding companies around the announcements of dividend

cuts and omissions from 1971 through 1991.
For the first test they find that the announcement is associated with
increases in institutional ownership. Regarding the second test they find that
comptroller announcement altered the market`s reaction.

The TBTF

doctrine extends to smaller banks and as results cause negative reaction to

negative information transmitted to the market.
4.) An extended research was given by Gray (1997) . He examine the TBTF
in bank failures from 1985 to 1994. He uses

Public Choice Economic

theories to develop his model of the choice made by FDIC, particularly

theories involving bureaucracies, interest groups, individual utility functions,
regulations and voting,taking into consideration two landmark banking laws,
FIRREA2 and FDICA3. He test 20 variables and their effect on the size of the
bank.
He find that between 1985 and 1989 the variable is statistically significant
and positive, indicating that TBTF doctrine exist. Nevertheless, the variable
SIZE is statistically insignificant between the enactment of FIRREA (1989)
and the enactment of FDICA(1991) but statistically significant after 1991,
this means owners of uninsured deposits in smaller banks are favored.
THIRD SECTION
This section summarizes the policies from the past and into the future that
aim to deal with the doctrine, both in the US and around the world.
One can star mentioning the Basel approach , this policies measures for
TBTF banks are based mainly in microprudential regulation, that sets
minimum requirements for the ratio of risk weighted assets to common
equity Tier 1 capital. One problem of this approach is that does not capture
the risk to others, or to the system as a whole, created by an individual
bank failure.

2 The Financial Institutions Reform, Recovery, and Enforcement Act of 1989

(FIRREA), is a United States federal law enacted in the wake of the savings and loan
crisis of the 1980s.
3 Federal Deposit Insurance Corporation Improvement Act of 1991

The design of policies to target specific financial market externalities such

as TBTF are difficult to observe , to quantify and to implement . Hence , due
these uncertainties and measuring

problems the objective of regulatory

policies developed to address the TBTF problem have been designed to :

(i) reduce the probability of failure of global systemically important banks

(G-SIBs).

(ii) reduce the extent or impact of the failure of such G-SIBs; and

(iii) level the playing field by reducing the competitive advantages in

funding markets that these institutions have.
We will expand on each of these three key objectives and describe the policy
responses developed by the Basel Committee on Banking Supervision and
the Financial Stability Board (FSB). Which are can considered as Global
Authorities in financial supervision.
-Reducing the probability of failure of G-SIBs
Reducing the probability of failure of G-SIBs is the main goal of the
regulatory response to the too-big-to-fail problem. Raising the amount of
going-concern capital for these institutions through the application of a
capital surcharge will lower their probability of failure. This in turn will lower
the ex ante expected impact of their failure.
Basel has developed a methodology to identify Global systemic Banks , this
methodology take indicators such as size, interconnectedness, global
activity and complexity. The Basels objective is to disincentive to a G-SIB
becoming more systemically important.
-Reducing the impact of failure
The simplest way to reduce the impact of a firm's failure is to reduce its
systemic importance directly , then financial authorities must place limits on
the firm's size or business functions.
Restrictions on the activities that banks can undertake have been proposed
in some countries. For example, in the United Kingdom proposes ringfencing traditional retail banking business activities. The Volcker Rule in the

United States proposes restrictions on proprietary trading by banks and

limits on owning and investing in hedge funds. In Ecuador, since 2012,
private banks were obligated to sell their non banking business activities,
such as insurance companies, newspapers, television channels, etc.
The aim of these proposals is to separate essential banking services from
other speculative activities. Thus this help to reduce the impact of the
failure of certain banks and their effects on other sectors of the economy
and also this avoid the use of deposits as a fund for other shareholders
investment operations.
At the international level, efforts to reduce the impact of a G-SIB's failure
have focused on improving recovery and resolution regimes and promoting
bail-in within resolution. These measures target the problem that certain
firms are difficult to resolve or place into resolution. This applies in particular
to large, complex cross-border firms.
-Levelling the playing field by reducing too-big-to-fail funding
advantages
The advantages enjoyed by TBTF banks are significant , some studies have
found a funding subsidy of as much as 60 basis points during normal times
and more during crisis periods.
The policies discussed in this article , such as , the capital surcharge,
restriction on certain business activities , all help to mitigate this subsidy. In
addition, the Basel III framework now requires all regulatory capital to fully
absorb losses at the point of non-viability before taxpayers are exposed to
loss.
It seeks to address the problem that, during the financial crisis, Tier 2 capital
instruments (mainly subordinated debt), and in some cases Tier 1
instruments, did not absorb losses incurred by certain large internationally
active banks.
Evidence in the Wolrd
In this part we show some evidence of TBTF . At the late of 2007, many
governments around the world started to help their financial sectors in a

number of different ways. Some banks were offered government funding or

central bank liquidity insurance schemes, others received capital injections
or were nationalized outright, and some were offered no support at all. The
key concept of this behavior was to maintain future financial stability.
We have found academic literature about TBTF in UK, Germany, Brazil and
others countries. In the next section we will review literature about TBTF in
the rest of world.
Rose and Wiedelak (2012) examine the determinants of a number of public
sector interventions , such as central bank liquidity , insurance schemes,
public capital injections , government funding , for

rescuing

UKs

institutions. They also examine it this interventions had an impact on bank

behavior
They find that a British banks size had a strong effect on the likelihood of
intervention: larger banks were more likely to be assisted. And these
interventions mattered in a tangible sense: they seemed to restore access
to wholesale funding. More precisely, the share of non-retail deposits in total
liabilities rose by over 38% following the intervention, an amount that is
economically and statistically significant. As one objective of crisis
intervention was precisely to stabilize flighty financial market funding, it
seems to have been effective.
In the last section we find some examples of government bailout to larger
companies, most of them were given under the TBTF policy. These
companies were considered SIFI then was necesary to bailout them.
In this section we present some empirical evidence and test
Tabak, Fazio and Cajuerio (2010) using a 473 Latin American banks
investigate how bank concentration and size have an influence in cost/ profit
efficiency and risk taking behavior.

They contribute to TBTF literature ,

because their paper shows if the financial sector of a region composed of

developing economies need the same regulation of those in developed
regions.

They

measure

efficiency

and

its

determinants,

such

as

market

concentration, bank size, and other variables using a Stochastic Frontier

Analysis. An analysis of what drives bank risk-taking behavior is also given.
TEST.
XXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXX

The authors do not find evidence about the effect of market concentration
on efficiency and risk taking behavior; nevertheless they take in account on
how

bank

size

influences

financial

stability

at

different

level

of

concentration.
They have found that bank increase their sizes in order to gain economy of
scale. Latin American banks performs better as a whole. Concentration
seems to reduce cost efficiency and to increase insolvency risk.
In the LA markets , large banks are risk takers and their profits are no so
high as in a more diffuse banking market. This could be considered as TBTF
behavior : banks that perceived themselves as TBTF may incur in more risks
. They recommend the implementation of BASELIII for reducing the chance
of systemic crisis in Latin American financial sector.
Concluding thoughts
Prior to the crisis, numerous academic studies and banking textbooks
discussed the too-big-to-fail problem and moral hazard more generally.
However, I am sure that, even for those who have written about these
issues for many years, the true depth and seriousness of the concerns were
only revealed during the recent financial crisis. I remain somewhat surprised
to hear the occasional voices which claim that the too-big-to-fail problem is
overstated.
It is imperative that we not only cope with the too-big-to-fail problem, but
that we also deal with it effectively. The capital surcharge for global
systemically important banks introduced by the Basel Committee is a
significant step in the right direction. The same is true of the progress on
improving recovery and resolution planning.
Finally, the Macroeconomic Assessment Group, which I chair, has issued its
final report on the economic impact of requiring additional loss absorbency

for global systemically important banks. The results show that the
transitional costs of higher capital requirements for global systemically
important banks are very small, and that the long-term economic benefits
are very large.
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